Lion Nathan seeks solutions to Chinese puzzle

While many shareholders would like to see the ailing Eastern limb amputated, the Lion Nathan CEO is determined to make it turn a profit. DITA DE BONI reports.

A journalist can never be sure how she or he is going to find Lion Nathan chief executive Gordon Cairns.

Always concise - and frequently taciturn - Mr Cairns is a man who does not mince words and seems to have little time for frippery.

But today he is jovial and accommodating. After the third consecutive year of consistent revenue and profit growth, coinciding almost exactly with his reign as chief executive, there seems to be plenty for him to be satisfied with.

China is the only division of the company turning in losses, and clearly many shareholders would like to see the ailing Eastern limb amputated. Mr Cairns is somewhat less emphatic in his assessment of the area.

"If we are in delicate negotiations with parties in China, why should we cut and run when we can get some money?" he asks in a melodic Scottish burr.

Slowing economic growth, intensifying competition and years of poor returns have seen foreign brewers including Foster's, Beck's and Anheuser-Busch (Budweiser) reassess their position in the Chinese brewing marketplace, with some slipping out quietly in defeat.

The latest casualty, Danish brewing giant Carlsberg, recently said it would offload its loss-making Shanghai brewery to Chinese brewer Tsingtao for $12 million, after losing up to $12 million a year there since its arrival 10 years ago.

Lion's China assets, worth $A299 million ($395 million), or 9 per cent of the company's total, include the fixed assets and gross working capital of the wholly owned Suzhou brewery and 90 per cent of Wuxi.

Some reports suggest the company will have to write down the value of the assets by about $100 million to sell them outright, although the company plays down a full sale.

"What I've said is that we are looking for solutions that enable us to make money in China.

"We've got a good business up there, we've got great employees - we're not putting a For Sale sign up."

Mr Cairns is also keen not to apportion any blame to the prime originators of the China move, chairman Douglas Myers and former chief executive Kevin Roberts.

Mr Roberts also sent Lion headlong into the Australasian Pepsi business, something Mr Cairns has spent several years trying to extricate the company from.

"Four or five years ago when a lot of international brewers, including ourselves, went into China, they made the right decision at the time, given the facts," he says.

"Hindsight's a great thing ... with the benefit of four or five years of wisdom, we can be very smart."

Western brewers, including Lion, assumed when they moved into China over the last decade that the local industry would consolidate and prices would rise through a combination of factors, including a growing middle class.

Instead, the communist nation's economy has been deflationary, and international brewers are sabotaging one another for a share of the still-fledgling premium market, estimated at about 5 per cent of the total beer market.

Meanwhile, the 730-odd Chinese brewers continue to produce beer that can retail for as little as 9c a bottle.

For Lion, losses from China have slowly decreased each year but still totalled $24.3 million in the last 12-month result.

"It's not going to change in the short term. It will eventually - that's why we are confident we can make money in China.

'But we've been there four or five years now, and we've lost money for four or five years. It won't be acceptable to do another five years like that."

Leaving China aside, Mr Cairns says there is still plenty of room for growth in Australia and New Zealand, and the company is not looking at any other foreign markets at present.

More than just a brewer, Lion is now a "liquor" concern, he says. In New Zealand the brewer licenses its spirits assets and holds 28 per cent of Montana Wines.

Mr Cairns is optimistic that Lion will be granted another seat on the Montana board.

Even in the relatively flat Australasian beer market, he says premium and low-alcohol beer have further potential as drinkers become more discerning.